How to give retirees the confidence to spend Super balances are steadily growing, but an efficient retirement spending system is still a work in progress, writes the Actuary Institute’s Andrew Boal. He pinpoints the problems and offers some solutions.
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ustralia has one of the best retirement systems in the world for accumulating savings. Yet, like many other countries, we continue to struggle with how to design an efficient retirement spending system. To some extent, this can be attributed to the absence of a clear purpose as to what we are trying to achieve. Following a recommendation by the Financial System Inquiry, the Superannuation (Objective) Bill was introduced to Parliament in 2016 to establish the primary objective of super: “to provide income in retirement to substitute or supplement the Age Pension”. While it is a start, it does not provide a lot of direction. The Explanatory Memorandum provided more guidance, and two of the proposed subsidiary objectives noted at the time were to facilitate consumption smoothing over the course of an individual’s life, and to manage risks in retirement. Unfortunately, these objectives have lapsed in Parliament, so we still have some uncertainty about the overall pathway to better retirement outcomes. More recently, in September 2019, Treasurer Josh Frydenberg announced a review into the retirement income system as recommended by the Productivity Commission in its report, Superannuation: Assessing Efficiency and Competitiveness. The panel appointed to run this important review was given the task of identifying the facts that will help improve understanding of how the retirement income system operates and the outcomes it is delivering for Australians. The terms of reference for the review state: “It is important that the system allows Australians to achieve adequate retirement incomes, is fiscally sustainable and provides appropriate incentives for self provision in retirement.” In this context, the panel identified four principles to assess the performance of Australia’s retirement income system: adequacy, equity, sustainability and cohesion. This latter one, cohesion, is particularly important. How do the various parts of the system work together to improve retirement outcomes in Australia? 12
Retirees in ‘the middle’ It is only recently that a significant number of Australians began retiring with material retirement savings, with around 35 per cent of superannuation balances at retirement reaching $250,000 or more. Over the next 20 years, this is set to change with almost 65 per cent reaching that level. While around 15 per cent of superannuation balances will exceed $750,000 in 20 years’ time, as a proportion, retirees in ‘the middle’ will double from around 25 per cent to 50 per cent. Retirees in this ‘middle’ group are likely to be eligible for a part Age Pension for a substantial portion of their retirement and, as a result, the means test rules will be an important consideration for them. As we all know, the means tests are targeted to help keep the cost of the Age Pension at an affordable level as Australia’s population ages. But this also makes them complicated and more difficult for retirees to navigate. It is also worth noting that legislation was passed in February 2019 to amend the means test rules that apply to longevity protection products with effect from 1 July 2019. Under the new rules, only 60 per cent of the purchase amount of a lifetime income stream will be an assessable asset and only 60 per cent of the payments will be income for the means tests. These regulatory changes should, in time, promote the development of new longevity protection products such as deferred lifetime annuities (DLAs) or deferred group self-annuitisation (GSA) products, which should help retirees plan their retirement spending with more confidence. However, they add further complexity. By way of example, consider a person who is a homeowner, who retires at age 67 with a superannuation account balance of $500,000 and who uses $50,000 to purchase a DLA. With 40 per cent of the purchase price (or $20,000) no longer counting for the assets test, this person will be entitled to $1560 per annum more in Age Pension payments for around 10 years.
YourLifeChoices Retirement Affordability Index™ November 2020
